Notes - FINA124Notes 18:35 JunkBonds Howaretheyrated? o...

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FINA 124 - Notes 18:35 Junk Bonds How are they rated? o Capital structure Ratios, financials etc. o Profit growth Volatility of earnings Volatility of operating profits o What rating does the firm want? Need the companies to disclose information… Biased ratings, circularity Perpetual Bonds No maturity (perpetuity) o Fixed coupon rates (i.e. preferred shares) PV of future payments is negligible, so not infinite price on a perpetual bond Preferred Stock Pays stable dividend indefinitely o Junior to bondholders Some voting rights, not usually but in major decisions Dividends accrue in arrears before new/future dividends can be paid (or  before common stock dividends are paid) o As opposed to bond where you simply default Firm’s preferred dividends used to be largely tax deductable o Not anymore (Bush) Common Stock Dividend is not as high as preferred and not guaranteed Voting rights/ownership of firm
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o More frequent voting participation compared to preferred stock, including  management hiring/firing Highest risk (best results if performing well, and vice versa) **Cases   short-term capital needs, then long-term capital (see above) Short-term vs. Long-term Capital Short-term needs are met by going to a bank and requesting capital to borrow
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This note was uploaded on 10/20/2010 for the course FINA 124 taught by Professor Ismaildalla during the Spring '10 term at GWU.

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Notes - FINA124Notes 18:35 JunkBonds Howaretheyrated? o...

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